The Wound of the Global Economic Crisis

It’s been two years since the American investment bank Lehman Brothers declared bankruptcy. The economic crisis has, in a big way, changed the way we look at how banking management and regulation should function. The government has appeared proactive and propped up the economy, but in developed countries, it’s hard to say that the goal of an autonomous private sector led economic recovery is taking place.

In Europe, the expansion of the budget deficits has caused new financial market turmoil. The fear has started to spread that America won’t be able to avoid falling into the same situation as Japan did with the bubble collapse and the resulting long standing economic stagnation.

External Demand Expected to Strengthen the U.S. and Europe

What invited the financial crisis was the American housing and securities bubble. While the era of a glut of money continued, Wall Street fought desperately to develop its financial products.

A representative example is subprime loans (loans targeted at people with low credit who want to buy a house) that were a foundation of financial products. This house of cards piled up by securitization toppled completely when Lehman went bankrupt.

This is a 1930s-type crisis — an era of spiraling panic — that the world is facing. Each nation should value agile negotiations. America implemented investment and loan guarantees and the U.S. Federal Reserve Board (FRB) extensively bought property.

Europe has countries that made a bold start with nationalizing banks. The FRB made a bold move with its zero percent interest rate policy, and the Obama administration set out with large-scale government spending. Developing nations such as China have also taken large economic measures.

After the spring of 2009, the policy effects manifested and the market temporarily slanted toward optimism, but things didn’t work out as expected.

The impetus was the crisis in Greece in spring of this year, representing the unrest in Europe. From the start, several countries in southern Europe held budget deficits. There, after the Lehman shock, government spending increased and they lost acceptance into the money market. Europe experienced a two-fold crisis of public finance and loans.

Matching pace, the gait of America’s economic comeback was also shaky. At the end of April, after discontinuing the housing tax reduction, the housing market once again grew cold. The over-spending in family finances became a pressure and the expectation that spending would resume to be as vigorous as before disappeared.

At the present time, FRB Chairman Bernanke has wracked his brains, and America has fallen to be the number two runner up and is currently facing deflation, much like Japan. The Obama administration has worked out a supplemental economic stimulus of $350 billion, but this was done in preparation for the November midterm elections and is not meeting earlier established goals.

Europe’s money market, which is facing deficits, has rung out the alarm bell, and in June’s Toronto Summit insisted in its primary declaration that developed countries revamp their financial affairs. This heralds a change in the economy’s principal campaign. The degree to which domestic demand will have a drastic impact is difficult to anticipate, and America and Europe are aiming principally at exports as an economic comeback.

After the Lehman Brothers collapse, many predicted that developing countries such as China, which have maintained their expansive growth, would be in demand in America and Europe. In order to support exports, America and Europe have each approved the cheapening of the dollar and the euro, and a kind of currency cheapening competition has emerged.

Japan has strengthened America’s and Europe’s foreign consumption intentions, and even though the global market has changed, the realization of this has been delayed. Since summer of this year, various currencies have been sold off in favor of the yen, and the rising fear was that new industries were being made hollow. It is also the case that this shows the absence of currency diplomacy.

In contrast with loans, the trigger for the economic crisis, various regulation movements have been spreading. Financial institution soundness regulations have been strengthened, and on the one hand, securities regulations have been called for while regulatory oversight organizations are keeping an eye on not only individual financial institutions but also on macro-economic issues. Many nations are aiming at this trend and are having numerous negotiations. America will pass financial regulatory reform laws based on the Volcker Rule, which prevents banks from taking on excess risk.

Regulations Focusing on Reality

The strengthening of banks’ net worth is becoming international financial reform’s largest theme. The Basel Committee on Banking Supervision, created by principal countries’ bank supervision authorities, announced the new capital adequacy ratio regulation plan aimed at banks in December. If by chance there are reliable funds, Basel has decided that the “core of capital adequacy ratio in the strictest sense” will essentially be raised by 7 percent by 2019.

Lately, the country most seeking the strengthening of the regulations of owned capital has been America, the epicenter of the financial crisis. America’s thinking has been that bank loan ratios, which are compromised of credit, have been low, and strict regulations are tied to the acceptable market recovery. Compared to this, Japan’s and Europe’s ratios are high, so there is a difference of opinion on bank regulations.

National bank owned capital is weak. Whatever they have left is unlikely to be used to grant loans. At present, I want to welcome the calm that will come with the capital adequacy ratio being pulled up through a gradated method starting in 2013 by means of long-awaited regulation plans.

These regulations are necessary in order to stave off new crises, and Japan should heap on effort to keep banks healthy, but keeping a balance with the situation still at our feet is also extremely important.

The making of financial regulations is also an important theme in economic diplomacy. In the world after the financial crisis, each country will put national interests at the forefront, and naturally, the trend to lead toward a profitable conclusion will be strong. Focusing on this, Japan should aim to feel at ease without losing anything.